Automated Trading Strategy #0
Strategy 0 is a strategy for strategies. Strategy 0’s net profit and cash flows are a derivative of the underlying strategy and those cash flows are more predictable in both quantity and amount.
There is no guarantee that these strategies will have the same performance in the future. Some may perform worse and some better. Backtests are based on historical data, not live data. Backtests are used to compare historical strategy performance and are inherently flawed due to the limitations of the simulation. We therefore use backtests as a “first test” to further study and advise you do the same. They should not be traded live unless you are prepared to lose all of your money. Trading futures is extremely risky. If you trade futures live, be prepared to lose your entire account. We recommend using our strategies in simulated trading until you/we find the holy grail of trade strategy.
For a link to all strategies click here.
Click on the table to enlarge.
Strategy 0 is one of our best yet. Instead of naming what would be Strategy 49, “Strategy 49”, we’ve decided to name it Strategy 0. We refer to it as Strategy 0 because you can use this strategy with any strategy as long as it has a certain profit factor and makes a certain number of trades. We’re using the reliability of the strategy’s cash flows to make trade decisions rather than the reliability of market indicators, which are anything but.
Our primary goal is to find the holy grail of automated trading strategies. We’ve defined the holy grail of trade strategy to be the following (based on annual performance):
Profit factor greater than 3
Annual drawdown less than 3%
Annual return on max drawdown greater than 500%
Maximum daily loss is -$1,000
Avg Daily profit greater than $1,000
Less than 5,000 trades annually
More than 253 trades annually
We’ve come close to this goal, but have yet to actually find it. One obstacle, as I’ve said before, could be the attributes we’ve defined above. But, what exactly is the holy grail of trade strategy? The attributes above help to quantify it, but if I was to conceptualize the request I would say it is simply a strategy that never loses money. I think there’s been a reluctance on my part to make the requirement so simple because it also seems so unattainable, but I think if I had to choose between the two definitions: a) a list of attributes as defined above, or b) a strategy that never loses money, I would choose the latter. That is, if a genie came along and gave me three wishes, one of them would be for a strategy that was always profitable on every trade, not a strategy that meets the attributes we’ve defined as the holy grail. So, while we will continue to use the attributes we created in the beginning of this endeavor, we also want to keep this new definition in mind.
In Search Of A Strategy That Never Loses Money
One thing you’ll notice if you create enough strategies is the propensity for most strategies to trend toward a profit factor of 1. This means that the gross profit is the same as the gross loss over time. I’m always amazed at this particular attribute of strategy performance, but it makes sense, especially for strategies where the long and short commands are simply the opposite conditional indicators. These strategies tend to outperform in a sideways market and break-even or perform poorly when the market is trending. We can tell if the strategy is trading in a highly positive market by looking at the MACD and its relation to zero. The same is true for a highly negative market. In other words, we can know that a market is setting higher highs or lower lows the further away it is from an MACD of 0. Likewise, a strategy that hovers around 0 is likely trading sideways. Is it possible to use these conditions to create a strategy with predictable cash flows? The answer is yes, but it requires discipline. That discipline is what we’re trying to create in Strategy 0.
Professional traders already know this strategy. They know to get out when you’re up. This is their edge. It’s easy to fall into the rush of a win, however small, but this is a trap. Strategy 0 can help to navigate this trap. It is designed to get out when you’re up. It is the kind of discipline that only professional traders and automated trading strategies have.
Theoretically, Strategy 0 should only end the day if it is profitable and as long as there are enough trades in the day, it will end the day profitably. The only qualification you need to ensure this occurs is a balance of trades.
Before I get into how Strategy 0 works, let’s take a minute to understand what I mean by ‘balance of trades’.